ACCA Applied Skills · Financial Reporting · Limitations of interpretation techniques
Which of the following is a consequence of inflation when trend analysis of reported revenue over five years is performed using unadjusted historical cost financial statements?
Apparent growth may overstate real growth. Revenue from different years is measured in money with different purchasing power, so part of any nominal increase reflects price rises rather than higher volume. Trends should be adjusted for inflation before conclusions about real growth are drawn.
- AApparent revenue growth may overstate real growth in volume, because the figures are not expressed in constant purchasing powerCorrect
- BReal growth in volume is always understated, because inflation reduces unit sales
- CTrends are unaffected, because revenue is a current-period measure
- DRevenue growth is overstated only for entities that revalue their property
Explanation
Revenue from different years is stated in money of differing purchasing power, so part of the nominal increase is just price change. Inflation does not necessarily reduce unit sales, and revenue is affected whether or not property is revalued.
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